On 22 April 2021, the Fund Jurisdiction Act (Fondsstandortgesetz – FoStoG)[1] was passed by the German parliament (Bundestag). The primary objective of the law is to (further) strengthen Germany as a fund jurisdiction. In addition, the requirements of the so-called Pre-Marketing Directive[2] are to be implemented. The law mainly makes changes to the Investment Code (Kapitalanlagegesetzbuch). However, there are also favourable tax changes for German venture capital funds, start-up companies and their employees.
1. What and whom does the new Fund Jurisdiction Act regulate?
The Fund Jurisdiction Act is a package of amendments that changes numerous laws, in particular the Investment Code, but also the Investment Tax Act (Investmentsteuergesetz), Income Tax Act (Einkommensteuergesetz) and Value Added Tax Act (Umsatzsteuergesetz). Other legal acts and ordinances will also be amended.
The changes brought about by the Fund Location Act highlighted in this article affect capital management companies and their funds as well as start-up companies and their employees. Indirectly, capital management companies’ asset managers and advisors are also affected.
2. Notable changes
a) Digitisation
In numerous places, the written form requirement will be replaced by a text form requirement. For example, regarding the contracts of special funds.
In the long run, communication with the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) will generally take place via an electronic communication platform provided by BaFin.
b) New fund types
A new fund type “infrastructure fund” will be introduced in the mutual funds category (funds that are also aimed at retail investors), which can invest in infrastructure project companies.
In addition, another new type of special fund will be introduced: the development promotion fund (DP Fund). The DP Fund combines European sustainability promotion with the possibility of investing in developing countries/emerging markets with a special fund vehicle. Compared to the other, “traditional” German fund types, it also offers more flexibility, because it may, for example, originate loans even without owning interests in the borrower, which is otherwise only permitted in exceptional cases and only to a limited extent.
c) Newly permitted assets, legal forms and structures for investment funds
While closed-ended funds could previously only be set up as investment stock corporations (Investmentaktiengesellschaften) or investment limited partnerships (Investmentkommanditgesellschaften), the Investment Code will also allow the contractual form (Sondervermögen) as a permissible legal form.
In the future, real estate funds will no longer have to comply with the 50% limit – regarding the loans granted to the respective real estate company and the real estate of such company – and the 25% limit – regarding all loans granted to all real estate companies and the fund’s NAV – when granting loans to real estate companies that acquire or hold real estate, provided that the fund holds a 100% interest in the real estate company. In this way, it will also be possible to grant loans without these quantitative limits not only to real estate companies which acquire or hold real estate, but also to real estate holding companies which do not acquire or hold real estate themselves, but rather their subsidiaries.
Special real estate funds in the form of an open-ended special fund with fixed investment conditions (offener Spezial-AIF mit festen Anlagebedingungen) may take out loans of up to 60 instead of previously 50 percent of the market value of the directly or indirectly held real estate. On the investment tax side, this is introduced for special investment funds (Spezial-Invstmentfonds) as well, which are in principle subject to a preferential taxation regime, thus ensuring an equivalent treatment.
For open-ended real estate special funds, the investment limited partnership may be selected as a vehicle as an alternative to the contractual form. In this way, the advantages of a company structure (shareholder status of the investors and corresponding participation and control) can be combined with redemption rights (possibly after a minimum holding period).
Last, but definitely not least, soon, (all) crypto values can be acquired by open-ended special funds with fixed investment conditions, up to 20% of the fund’s NAV. From an investment tax perspective, crypto assets will also be included in the investment catalogue of special investment funds with a corresponding 20% limit. Furthermore, open-ended special funds with fixed investment conditions may also invest – without any quantitative limit – in infrastructure project companies.
d) Closed-ended master-feeder structures for mutual funds
In the future, closed-ended mutual feeder funds may invest in closed-ended mutual master funds. The general rule that special funds and retail funds cannot be part of the same master-feeder structure is maintained.
e) Distribution/Marketing
The commencement of pre-marketing, i.e. activities before and below the threshold of marketing in the regulatory sense, will be subject to a notification obligation. However, the notification does not have to be made prior to the commencement of pre-marketing, but can be made within two weeks. The scope of application of the so-called reverse solicitation will be substantially reduced, since for 18 months after the commencement of pre-marketing, a distribution event will be deemed in case of a subscription of units of the “pre-marketed” special fund and a distribution notification will be required. Therefore, in the future, many pre-marketing activities will have to be followed by marketing notifications.
Furthermore, provisions on the revocation of marketing activities will be introduced for EU and foreign capital management companies.
f) Tax incentives for start-ups and venture capital funds
The Fund Jurisdiction Act also aims to promote start-ups and venture capital funds through favourable tax measures. On the one hand, the tax treatment of company participations (Vermögensbeteiligungen) will be adjusted for the benefit of start-up companies and their employees, and on the other hand, the management of venture capital funds will be exempted from VAT.
The tax allowance for company participations will be quadrupled from 360 EUR to 1,440 EUR.
Furthermore, income of employees from company participations can be temporarily treated as tax-exempt for up to twelve years after deduction of any allowances – provided that the employment relationship has not been terminated before. Micro-enterprises as well as small and medium-sized enterprises (SME) are eligible for this treatment.
The management of so-called venture capital funds will be exempted from VAT. Unfortunately, the term “venture capital fund” is not legally defined.
3. Entry into force, transitional provisions and outlook
The amendment to the Investment Code regarding BaFin’s electronic communication platform is scheduled to enter into force on 1 April 2023. In all other respects, the amendments to the German Investment Code are scheduled to enter into force on 2 August 2021, subject to certain transitional periods with regard to new regulations regarding reporting obligations. The amendments to the Investment Tax Act are also scheduled to enter into force on 2 August 2021. The amendments to the Income Tax Act and Value Added Tax Act are already scheduled to enter into force on 1 July 2021.
Capital management companies interested in launching infrastructure special funds and/or development promotion funds should ensure obtaining a proper licence (extension) in a timely manner, if necessary. With regard to planned investments in crypto assets and/or infrastructure project companies via existing open-ended special AIFs with fixed investment conditions, it should also be clarified with BaFin whether a licence extension is required.
In addition, capital management companies should consider whether their existing and new business can be optimised by making use of the new structuring options.
[1] Act to strengthen Germany as a fund jurisdiction and to implement Directive (EU) 2019/1160 amending Directives 2009/65/EC and 2011/61/EU with regard to the cross-border distribution of Undertakings for Collective Investment (Fund Jurisdiction Act)
[2] Directive 2019/1160/EU of the European Parliament and of the Council of 20 June 2019 amending Directives 2009/65/EC and 2011/61/EU as regards the cross-border marketing of collective investment undertakings
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